This Deal Could Be Huge for Baidu Stockholders
Two of the biggest movers and shakers in the Chinese e-commerce market, Baidu, Inc. (NASDAQ:BIDU) and Ctrip.com International Ltd. (NASDAQ:CTRP), have joined hands to shift the dynamics of China’s online travel ecosystem. CTRP stock is up over 23% on Monday’s midday trading, while BIDU stock is surging close to six percent.
Baidu and Ctrip entered into a share swap deal earlier this week, under which Baidu will end up with a 25% controlling stake in Ctrip and Ctrip will land a 45% share in Qunar Cayman Islands Limited (NASDAQ:QUNR). Top executives have also been exchanged between the two companies’ boards of directors.
The clever move between Baidu and Ctrip will help the two bolster their position in the Chinese travel industry. China’s Google, Baidu, will manage to tap into travel e-commerce to strengthen its online to offline (O2O) business, while Ctrip will gain a controlling stake in its archrival Qunar Cayman Islands, which rejected Ctrip’s unsolicited buyout offer earlier this year.
The move comes as we see other similar consolidations in the online travel industry, owing to growing competition. Lately, Priceline underwent a deal with its competitor TripAdvisor to integrate its hotel bookings web site, Booking.com, within TripAdvisor’s platform.
What Does This Mean for Ctrip.com Stockholders?
The integration of Qunar Cayman Islands and Ctrip.com, both of which are heavyweights in the Chinese online travel industry, will help them jointly align their marketing campaigns, instead of pitting them against each other.
Qunar is the fourth-largest e-commerce company in China and is cited as the second online travel web site. Ctrip has earlier suffered at the hands of rival Qunar, as the former couldn’t match up with Qunar’s aggressive spending on marketing and promotions. The deal will now allow Ctrip an ease in operations by neutralizing a major competitive force, and at the same time encourage Qunar to cut down on its expenses that have been causing a major dent to its net figures.
What Does This Mean for BIDU Stock?
On the other end of the spectrum, the deal will also boost Baidu’s position in the travel e-commerce industry. The Chinese travel industry is still raw and is expected to grow seven times from 2013 through 2030. (Source: Chinese Travel Firms in Tie-Up as Competition Rises, The Wall Street Journal. Last accessed Oct. 27, 2015). The China Tourism Research Institute reports that the outbound travel increased by 12% in the first half of 2015, compared to the same period in 2014. Amid the growing competition, Baidu is clawing for a chunk of this segment.
Baidu’s foray into the O2O business caused a dent in its second-quarter net earnings figure, courtesy of promotional expenses on the said business. The stock plunged post Q2 earnings announcement, despite positive growth figures. Two of its biggest Chinese rivals in the O2O services industry are Tencent Holdings and Alibaba Group Holding Limited (NYSE:BABA), both of which will be threatened by Baidu’s growing travel e-commerce share. Tencent Holdings has stakes in travel sites like eLong and Tongcheng which compete with Qunar and Ctrip, while Alibaba, too, has its own travel booking portal.
The Bottom Line on Baidu Stock
The technicals on BIDU stock price are looking good. The stock has been making higher lows and higher highs this month. I see an uptrend in play. Only 1.7% of its float is currently short, which is indicative of general positive investor sentiment towards Baidu stock.
Chart courtesy of www.StockCharts.com
There’s no questioning that the BIDU stock is headed for a win. Baidu is strategically positioned as a search leader in the most populous country of the world. The volume of Chinese traffic on Baidu far outweighs that on the global search leader Google.
Also, China’s latest move to cut interest rates has sparked a rally in the Chinese markets, which also bodes well for BIDU stock that has cratered 29% year-to-date.
I foresee a probable bull run in Baidu’s stock in the coming days and it wouldn’t surprise me if it rebounds back to its $200.00+ highs.